Lehmans 10 years on: The CFO view

On 15 September 2008, the collapse of US investment bank Lehman Brothers became the televisual moment of the financial crisis with images of redundant bankers pouring out of its giant slab of a building in Canary Wharf.

Although key elements of the crisis happened before and afterwards, the moment when one of the world’s great financial institutions suffered the biggest bankruptcy crystallised for many a real sense of financial Armageddon at that moment.

Ten years on, many of the UK’s leading CFOs reflect on where they were in the days leading up to the darkest period of the financial crisis and how they and their organisations survived the chaos of the following months.

Trouble brewing

What point the financial crisis started is open to debate. But by the Summer of 2007 the UK stock market had entered a period of extreme volatility. Banks begin to stop lending to each other due to market fears over exposure to potential losses on high-risk US mortgages, in what was known then as the ‘credit crunch.’

Mortgage lender Northern Rock sought emergency funding from the Bank of England, prompting the first run on a bank for more than a century and by February 2018 was nationalised for a temporary period.

By this point rumours were gathering pace about the vulnerability of the balance sheet of Royal Bank of Scotland (RBS), which under the cavalier leadership of Fred Goodwin had been on an aggressive global acquisition spree since buying Natwest in 2000.

Ewen Stevenson, the outgoing CFO of RBS, says of the approach of the bank’s management team that saw its balance sheet become bigger than the British economy after it acquired Dutch bank ABN Amro in late 2007: “I think at some point they translated top line growth or volume growth as the equivalent of value growth.”

Stevenson was at the time a Credit Suisse investment banker who would be brought in to help the UK government to try and save RBS after it began to fail towards the end of 2008 says: “If you looked at where all the subsequent problems arose, they were typically attributed to where we’d seen excess of growth in the period up to the financial crisis.”

Ian Smith, now CFO of challenger bank CYBG, that acquired Virgin Money (that itself bought up the ‘good bank’ of collapsed Northern Rock) earlier this year, says from 2000  he “spent seven years helping to run the audit of RBS,” while at Deloitte.

Smith describes the approach of the RBS management team under Goodwin, who later lost his knighthood, as “about the ambition trumping competence and capability occasionally, and some poor choices on risk. There were members of the management team that were aggressive, ambitious, all of those sorts of attributes that can come sometimes lead to dysfunctional or unhelpful behaviour,” he adds.

“I think part of the challenge of the leadership culture at RBS and I suspect it was something that permeated at other institutions in the lead-up to the crisis, was a little bit of ‘we know what’s right, we’re brilliant, we really don’t care what you think’,” adds Smith.

Pivotal moment

By July of 2018 the financial crisis was in full swing. Financial authorities stepped in to assist America’s two largest lenders, Fannie Mae and Freddie Mac, owners or guarantors of $5 trillion worth of home loans.

But it was the collapse of Lehmans that became the seminal moment- after a decision was taken not to save the stricken bank, while on the same day Merrill Lynch, another once formidable Wall Street powerhouse, was taken over by the Bank of America.

Suddenly companies of any size or sector were coming under pressure, especially those that had any relationship with the financial industry.

Kelvin Stagg, the CFO of global recruitment firm Page Group say: “I can’t think of an industry that would be more brutally hit than recruitment. We were three months off delivering £220m of operating profit in 2008. In 2009 we did £21m,” he reveals.

“At the end of 2008 although we’d made next to no profit, but there was about £150m of cash saving on the balance sheet because of all the working capital coming up. So there was never a worry that we could go bankrupt as long as we could ensure we stayed in profit- therefore we needed to go the headcount down as quickly as possible,” he says.

At rival recruiter Hays CFO Paul Venables describes the state of fear at the peak of the crisis. “My treasurer, the first person I spoke to every Monday morning, would take me through which money we had with which bank globally and we would decide which banks we were going to put money with, because we were worried about their financial strength,” he says.

Two days after the collapse of Lehmans, Lloyds TSB announced a £12 billion deal to take over Britain’s biggest mortgage lender HBOS after a run on HBOS shares. CYBG’s Ian Smith was to play another critical role in the financial crisis, as he’d joined HBOS as deputy CFO on 1 June.

“I joined an institution that knew it had some issues to deal with, and was determined to deal with them, part of it for example was strengthening the group finance function, risk and the central function. It was the result of recognition by CEO Andy Hornby and chairman Dennis Stevenson of what needed to be done,” says Smith.

But it was to no avail as HBOS was unable to withstand the full fury of the financial crisis, especially as the bank was heavily exposed to the collapsing Irish property market. “HBOS had a business in Ireland that suffered along with all the Irish banks with the property crash that ensued there,” says Smith.

“What sunk HBOS was Ireland, and actually not enough has been understood about that but the losses from Ireland that Lloyds incurred were greater than the losses from its corporate book,” he adds.

Smith was taken on as the deputy CFO of what became Lloyds Banking Group after the takeover of HBOS by Lloyds TSB- an act many believe was orchestrated by prime minister Gordon Brown.

“The period of the last quarter of 2008 was genuinely unprecedented in terms of the scale of the crisis and the measures that were taken to deal with it, so every single estimate of capital requirements and other things was wrong, by everybody at the time because nobody knew quite how deeply and quickly things would go.

“The stabilisation of the banking industry at the time absolutely was Gordon Brown’s finest hour. For the government to step in and put in significant capital and back stop funding and other things was essential. It was the scale and decisiveness of the action that I think was critical and helped to deliver success,” Smith insists.

Road to recovery

As the financial contagion enveloped big banks across Europe and the US, the UK government moved to save the banking sector- resulting in tens of billions of billions of pounds of taxpayers’ money being pumped into RBS and Lloyds Banking Group in return for partial state ownership.

“It was an extraordinary period of time,” says Ewen Stevenson, “Most major banks were under significant risk of failure. In the UK you had some combination of Barclays, Lloyds, HBOS, RBS all needing capital.

“The problem at that stage was, as you saw with Lehmans, was that if you let one of these big banks fail, you didn’t know what the collateral impact would be on the economy. Had RBS failed, it was impossible to understand the second order implications on the UK economy,” he adds.

Having played a key role in helping to save RBS during the financial crisis, Stevenson joined the bank as CFO in 2014 for the challenge of helping rebuild it. “Here was the biggest, most complex bank failure and most complex bank restructuring so if you like big, complex, intellectual challenges it didn’t come any more challenging than this,” he says.

By the Summer of 2018, RBS had agreed to a multi-billion pound settlement with US authorities, resolved its staff pension issues and starting paying a dividend again. These were all signs that the bank was moving towards some sort of health- at which point Stevenson revealed he was leaving the bank. He starts as HSBC finance director at the beginning of next year.

Superficially at least the world is in a better place. Penny James, the CFO of Direct Line, the profitable motor insurer sold off by RBS in 2014 as part of its road to recovery, says that’s largely down to the massive efforts to make banks and other financial institutions safe.

“Big financial services firms will have continuous relationships with their regulator, who will want to know what their options list looks like for any scenario,” she says.

James, who was chief risk officer of insurance giant Prudential before joining Direct Line last year, says those safeguards apply to other financial services groups such as Prudential that along with the banks are deemed globally systemic. “What the regulators are concerned about, are the knock-on effects on the economy elsewhere,” she adds.

While the biggest dangers of the financial crisis may have been addressed, its scars can still be observed today. As a result of the massive funding required to support the economy, the size of the UK’s national debt is vast and interest rates remain ultra-low.

Another effect is that a deep distrust of bankers appears to have been extended to corporates more broadly. Some observers say a wider anger at the activities of society’s elite, characterised by the reckless behaviour of bankers that partly led to the financial crisis, helped fuel the Brexit referendum decision.

Ten years on from the collapse of Lehman Brothers seems the perfect point from which to assess what has happened since, and where we are going next.

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